Public Bill Committee

[Mr David Amess in the Chair]

Clause 37

Amendment moved (this day): 106, in clause 37, page 21, line 36, leave out ‘and’ and insert

David Amess: I remind the Committee that with this we are discussing the following:
Amendment 95, in clause 37, page 21, line 37, at end insert—
Amendment 108, in clause 40, page 24, line 10, at end insert
Amendment 112, in clause 48, page 30, line 10, at end insert
I think that when the Committee adjourned for lunch, Mr Fuller had finished his intervention.

Nia Griffith: If I understood the hon. Member for Bedford—he will correct me if I am wrong—we are ironically almost in a situation where I am arguing for commercially negotiated agreements and he is arguing against them. That is not the usual position in which we would find ourselves, as he is a great champion of free enterprise.
The reasoning behind all this is simply that there have been allegations on both sides, as has been well documented by Hooper. On the one hand, the competitors of Royal Mail have felt that prices have not been fixed in their favour, and on the other hand, Royal Mail has felt that prices were not helpful to Royal Mail. The idea behind the amendment is that these types of negotiation should be commercial negotiations so that they make sense in the context of the real world. That is the purpose of the amendment and it links in with the previous amendment to which I spoke, although it approaches the issue the other way round.

Richard Fuller: The hon. Lady has an excellent memory of our discussions earlier. I understand the intent of her amendment, and she is correct to say that there should be a balance, but does she not understand that the impact of the amendment would be that the balance would move substantially against those who may be thought of as providing competitive services? I stress again to her that we did talk about getting the balance right, in terms of the relationship between post offices and the Royal Mail where there is an imbalance of power, as she asserted. Will she not accept that without any agreement or understanding between the competitive providers and the Royal Mail, leaving the matter to commercial negotiations would be like sending the competitor to the slaughter at the hands of a private monopoly—or a public monopoly?

Nia Griffith: That is a very difficult question to answer. I think that Hooper summed it up rather nicely in his report when he came down on the issue very ambivalently, saying:
“The regulator has to be able to take effective action to regulate a market which has room for competition with the benefits competition can bring, and to deregulate and take other action where appropriate to ensure that the universal service is sustainable.”
I am not sure whether that really gives us the answer to the question. We are trying to create a situation in which it is practical for Royal Mail to carry on with universal service provision but it is possible for competitors to come in. I would hope that by allowing commercial negotiation, but also putting in safeguards for the universal service provision, competitors would be able to come in, but I can understand what the hon. Gentleman is saying.
I suppose that if a regulator were very biased or veered too far towards helping the provider of the universal service obligation, that could be very unfair. The accusation by some of the competitor organisations has been about whether they would be subsidising an inefficient Royal Mail, or something of that nature. The regulator will have to be very careful, but I would have thought that the regulator would not want to get that involved; it would like to leave some leeway for commercial negotiation.

Richard Fuller: I fear that the hon. Lady is trying to have it both ways. She talks strongly of regulation, but her proposal is for commercial negotiation, so which is it? Is it commercial negotiation, or regulation? Again, I fear that the amendment would have a chilling impact on competition.

Nia Griffith: The bottom line for me is clearly the preservation of the universal postal service, and the actions of the regulator to preserve that and to ensure that it is a viable business and that everyone in the country benefits from it. That is the input that I would like to have.
The issue is finely balanced, as I said, and I will not read to the Committee the several pages written by Hooper on the subject. However, in getting the right balance, there is clearly quite a tension between the regulator allowing what is called headroom—enough opportunity for competitors to come in—and not damaging the universal service provision.
Let me turn to the other amendments in the group. Amendment 108 to clause 40 proposes inserting at the end of subsection (1):
“OFCOM shall exercise its power under subsection (1) if it considers that the provision of a service within the scope of the universal postal service by a person other than the designated universal service provider may impede the ability of the designated universal service provider to comply with its universal service obligations.”
The purpose of the amendment is to ensure that the opportunities for cherry-picking the services within the universal service are minimised. It prioritises the delivery of the whole universal service over the provision of a particular service. For example, it would prevent a postal provider from securing a limited delivery service in a highly profitable area while leaving the universal service provider to provide deliveries in the remaining areas at greater cost. The funding of the universal service is a complex arrangement. Such studies as have been undertaken on how much of a burden the cost actually is seem to be contradictory. What has certainly been mentioned in Hooper and in Committee is the need—[Interruption.] I welcome my hon. Friend the Member for Ochil and South Perthshire to the Committee. I am pleased that he has arrived safely.
How much of a burden is involved is a complex matter, partly because of the lack of sufficiently clear accounting—an issue that has been raised in Committee and by Hooper. We need much clearer accounting, so as to single out the cost of the universal service provision. The exact effect of another provider offering a partial service, while obliging the universal service provider to sustain the whole service, is difficult to state. We know from experience of the current access regime that failing to protect the universal provider can make it vulnerable to cherry-picking by competitors. Amendment 108 therefore offers protection to the universal service provider. Some hon. Members might think that we are being too protective, but protecting the service is an absolute priority for us, as is its viability, so that it remains accessible for all of us.
Amendment 112 would insert into clause 48, at the end of subsection (4):
“provided in either case that such action would not be likely to adversely affect the provision of the universal postal service in accordance with the service standards specified in the universal postal service order.”
That is fairly self-explanatory, and reflects the same arguments that were made for the other amendments in the group; it is about ensuring that the universal service provider can carry on providing the universal service, despite competition for parts of the service.
To sum up the importance of what the regulator will be doing in this respect, I go back to the Hooper report of 2008. Without reiterating the quite complex arguments explaining the good and the bad from all points of view, Hooper clearly said that the
“regulator should take an approach which balances the benefits of competition with the risks to the universal service. Preserving the universal service should remain the regulator’s primary duty.”
Our amendments should strengthen that position. We understand that the access regime has brought benefits and should be continued, but there is a need to review the way in which that access or headroom works. We must also bear in mind that the regulator has the important role of preserving the universal service, and that should be his primary duty.

Edward Davey: In the evidence sessions, we heard from Royal Mail and other operators that establishing a fair access regime would be critical for the new regime. When I was reviewing the 2009 Bill provisions, it seemed that the key was to get the right balance between protecting the universal service—a matter rightly stressed by the hon. Lady—and allowing all the benefits brought by competition and enabling deregulation. To be fair to the hon. Lady, she has acknowledged that we are involved in a balancing act, and getting it right is not a science but a judgment.
I should be absolutely clear to the Committee, as we were in our policy statement, that the Government are committed to encouraging competition in the postal service market. We have not moved away from that. That is absolutely critical, but it cannot happen at the expense of a universal service. That is the prime objective, so we have to manage and encourage competition in that regard.
I agree with the sentiments behind the amendments: nothing Ofcom does should undermine the universal service. However, that is exactly what we have provided for in the Bill. We have made those judgments, and we think that the Bill gets it right. All the amendments would add to the Bill something that is already catered for in the drafting—except the first part of amendment 95, and I will come back to that. I wish to reassure members of the Committee that I have looked carefully at the wording of amendment 106 to see whether it would add anything of substance to the Bill, because, as I say, I agree entirely with the sentiment behind it. I ask hon. Members to turn their minds back to last Tuesday evening, when we discussed Ofcom’s overarching duty to secure the provision of the universal service. It is that prism through which Ofcom will view all its regulatory decisions. It will always have to go back to clause 28(1), in particular, which states that
“OFCOM must carry out their functions in relation to postal services in a way that they consider will secure the provision of a universal postal service.”
That provision is not optional; it is not something that Ofcom does on day one and no other day, and it is not something that it does on some days and not others. It is what it has to bear in mind the whole time. Therefore, all decisions that Ofcom will have to take about post will have to begin and end with the question, “Does this help secure the universal postal service?”
In fact, clause 28(2) makes specific reference to Ofcom’s power to impose access conditions, so the clause that tells Ofcom that its primary duty is to secure the universal service refers to how it should go about that, in setting the access conditions. That reinforces the fact that Ofcom’s power to impose such conditions is subordinate to its requirement to secure the universal service. Indeed, Ofcom would be in breach of its statutory duties if it applied any access conditions that undermined the universal service. We deliberately made that change to last year’s Bill to meet concerns such as those that members of the Committee have expressed today. I hope that the hon. Lady will accept that the way in which we designed the clauses has strengthened the commitment to the universal service.
One might ask, as I did, “If the wording in amendment 106 does not contradict Ofcom’s duties, why not insert it for good measure?” The problem with adding wording for good measure is that it rarely has the desired effect; it can often have the opposite effect. My concern is that the additional wording would confuse and might undermine what is already clearly set out. It is therefore unnecessary. Highlighting the duty to secure the universal service in relation to one of the regulatory controls that the Bill gives to Ofcom could be interpreted as undermining its application to Ofcom’s other powers under part 3. I am sure that none of us would want that to happen.
The same arguments apply to amendment 112. Ofcom’s duty to protect the universal service applies whenever it considers imposing access conditions, so I hope that the hon. Lady recognises that the additional wording is unnecessary, and that she will not press the amendment.
Amendment 108 is slightly different from the others in the group. My understanding is that it seeks to clarify that Ofcom could use clause 40 if it felt that another postal operator was putting the universal service at risk by cherry-picking a universal service provider’s more profitable elements and providing a significantly reduced standard, by delivering letters on only two days a week, for example.
Again, I have a great deal of sympathy with the intent behind amendment 108. I have been clear at every stage of debate on the Bill that although I fully support fair and open competition in the postal service market, it cannot be at the expense of the universal service. I do not believe that the amendment would help in the way that the hon. Lady suggests that it might; on the contrary, it might have some extremely undesirable unintended consequences. In common with the amendments that we have just discussed, and for exactly the same reason, I believe that amendment 108 would call into question the overarching application of clause 28, and the extent to which that primary duty on Ofcom applies to its other functions under part 3, which would be deeply unhelpful. Furthermore, it is unlikely that the amendment would be compatible with the directive.
I was mindful of cherry-picking when we were designing the Bill and revising the 2009 Bill, and we shall discuss that in more detail when we reach clause 40. This morning, I discussed the importance of clause 40(2), which will provide Ofcom with the power to impose conditions to prevent cherry-picking by other postal providers working within the scope of the universal service. We shall debate that in greater detail later, but I refer to it now because it demonstrates that the hon. Lady’s amendment, which was designed to deal with cherry-picking, is not needed—other parts of the Bill deal with such concerns.

Nia Griffith: Perhaps I should wait until we come to clause 40, but will the Minister explain his views on sharing the universal service obligation between providers?

Edward Davey: I thought that we had dealt with that this morning. Under clause 34, Ofcom may decide to designate more than one universal service provider. Such a situation would occur only in two strictly limited circumstances: if there were a postal administration order, which would be an emergency situation, or if, under clauses 42 and 43, Ofcom decided that there was an unfair burden and wanted to remedy that by using the procurement option. Under the procurement option, measures would have to be taken and conditions set out to ensure that if there were more than one universal service provider—it is worth pointing out that just because one goes to the procurement option, it does not automatically mean that it will result in more than one universal service provider—they would have to work together to ensure that a universal service was provided across the whole of the United Kingdom. Part 3 makes that clear and builds on clause 34.
I mentioned amendment 95 earlier, because it is a bit different in that it would prevent Ofcom from stepping in to mandate access. I agree that access arrangements should be negotiated on commercial terms between Royal Mail and other operators. Indeed, that is exactly how the current access arrangements came into being and because Ofcom has a presumption against intervention—it may not impose an access condition unless tests are met—that is what we expect to happen in the future.
The purpose of clause 37 is to enable Ofcom to step in, if those commercial discussions have failed. That is not always as widely understood as it should be. Ofcom can step in only if it appears that to do so is appropriate for promoting efficiency and effective competition and conferring significant benefits on users. These are tough tests, so it will not be a free-for-all by any stretch of the imagination.
It is worth pointing out to those who have expressed concern that these are the same tests that must be met in the regulatory framework that applies to communications more generally. For the past seven years, since the Communications Act 2003 came into force, Ofcom has been working with these tests and using the tools to enable access, where appropriate, to the BT network. Consumers and competition have, without doubt, benefited from that, and we have seen improved access to a wider range of services and exposure to competition. That has made BT more able to compete with the new entrants, and it is a better business as a result of that competition. Everyone can benefit, but the question is about getting the structure right. The way in which we have set out the three tests in subsection (4) is robust, which shows how the commitment to the universal service with respect to access conditions will roll out.
The intention of the three tests—taken together with Ofcom’s general duty in respect of post and the requirement that any regulation it imposes must be objectively justifiable, non-discriminatory, proportionate and transparent—is to focus regulation, laser-beam like, on economic bottlenecks. By that I mean access to Royal Mail’s final-mile delivery network. Royal Mail, as I am sure that the Committee is aware, currently delivers 99% of all letters in the UK, so while there continues to be a monopoly, the regulator should be able to step in. The Bill ensures that the regulator can do so only in a limited set of circumstances, but it is important that it can step in to ensure that there is no dominance. If Ofcom did not have those powers, there would be a danger that we would snuff out competition. I believe that we have the balance right. Ofcom needs to be able to come in to protect the competitors without over-regulating the universal service provider. If Ofcom did not have the ability to step in to mandate access, there is a risk that dominance would go unchallenged and, ultimately, customers would suffer. I do not think that it was intended that the amendment should remove such important protections. Certainly the hon. Lady’s comments did not suggest that that was her intention. Given that our approach was included in last year’s Bill and that we have improved on it, I had hoped that we might have consensus on the point.
I hope that the hon. Lady will, on reflection, withdraw amendment 95 and not press the others in the group.

Nia Griffith: I am never quite sure exactly how far the fine words will carry over into practice. That is always my problem. There are times when I feel that assurances imply that things will probably be all right, but there is a slight sense of a wing and a prayer. That is why we have tabled our amendments—to strengthen things and make them more watertight.
I find it bizarre that despite the compliments that have been paid to amendment 106, it was nearly accepted, but not quite—I wonder what it did wrong not to win the Minister’s approval. If the will is there, it seems unhelpful of the Minister not to want to include our amendments. It would make a change, now and again, in the spirit of Christmas, to take one or two on board. I want to press amendment 106 to the vote, because it exactly expresses our meaning.
Hooper clearly made the point that talking about the Royal Mail is different from talking about some other utilities, which have huge infrastructure costs. There are aspects of the networks of enterprises such as the national grid or BT that are very difficult for anyone else to replicate. The point made by Hooper in his report was that something like 70% of the costs of Royal Mail are labour. It is footwork, as it were.
Indeed, the hon. Member for Bedford has mentioned other people being able to do something about the final mile. Hooper says that that, combined with the falling mail volumes, puts the Royal Mail in a tricky position with respect to the universal service obligation. It is probably easier for competitors to walk in and compete than it is in the fields of some other utilities, where the infrastructure needed is so great that they cannot simply set up and participate.
As Hooper has made that point, I feel that we are justified in trying to protect the provider that has the universal service obligation, because there are additional costs and responsibilities in comparison with any competitor who comes along to do the nice bits.

Edward Davey: Does the hon. Lady at least agree that the way we have set out clause 37(4), which some people have described as the triple lock because of the conditions that Ofcom must recognise—
“(a) promoting efficiency,
(b) promoting effective competition, and
(c) conferring significant benefits on the users of postal services” —
is a stiffer test than was in the 2009 Bill? I understand what she is saying, and have some sympathy with it, but will she at least admit that?

Nia Griffith: Indeed, as I noted earlier, the 2009 Bill specified (a), (b) or (c), whereas the Bill before the Committee specifies all three; nevertheless, there is never anything wrong with a bit of icing on the cake, and the amendment would make the provision even better.
On the commercial matter in amendment 95, the Hooper report made the point, which I have outlined, about a slightly different situation from that of the utilities—a situation that it is slightly easier to push in on. Therefore I do not think that the amendment is as detrimental as the Minister has suggested. The other amendments relate to later clauses, so I will finish my comments on that note, but we should certainly press the amendments to a vote.

David Amess: Does the hon. Lady want a Division on amendment 95? If so, that would take place after the Division on amendment 106.

Nia Griffith: Yes, because although it relates to the same clause it is different from amendment 106.

Question put, That the amendment be made.

The Committee divided: Ayes 7, Noes 9.

Question accordingly negatived.

Amendment proposed: 95, in clause37,page21,line37,at end insert—

Question put, That the amendment be made.

The Committee divided: Ayes 7, Noes 9.

Question accordingly negatived.

David Amess: We shall take the divisions on amendments 108 and 112 later.

Nia Griffith: I beg to move amendment 107, in clause37,page21,line38,leave out subsections (5) to (7).

David Amess: With this it will be convenient to discuss the following: amendment 115,page65 [Schedule 3], leave out lines 17 to 37.
Amendment 116,page65 [Schedule 3], leave out lines 38 to 41.
Amendment 117,page66 [Schedule 3], leave out lines 1 to 10.
Amendment 113, in clause57,page35,line39,leave out from ‘tariffs)’ to end of line 43.
Amendment 114, in clause57,page35,line46,leave out from ‘decision’ to end of Clause.

Nia Griffith: That looks like a large number of amendments, but they are all similar in meaning. The amendments to schedule 3 are simply a logical implementation of the amended clause 37. I will not, therefore, need to speak to each individual amendment, but I will give a general overview.
Essentially, we are looking at price controls. The amendments are similar to those we have just been talking about, but they would take out of the Bill the insistence on price controls because we have talked about the commercially negotiated way of doing things and see that as the way forward. Any agreement on access to the universal service provider could be made on a commercial basis, and the regulator would always have regard to the need to preserve the universal service obligation and to ensure that that did not in any way suffer. If we are to have that, logically we need to amend the parts of the clauses and related schedules that refer to price controls. It is not that we are suggesting that, for example, there is something wrong with the schedules themselves. The principle is that if we are not going to have those price controls expressed in that way, those elements of the Bill become unnecessary.
I do not want to repeat at great length the arguments we have been through this morning and this afternoon, but the idea of each of the amendments is to remove those sections of the Bill that refer to price control. Amendment 107 would remove subsections (5) to (7) of clause 37. That same idea is reflected in amendment 113, which would take out of clause 57 the chunk that refers to price controls. Amendment 114 likewise would take a chunk out of clause 57, removing subsection (13). The same thing happens in the amendments to the schedules. We are proposing to delete paragraph (3) in schedule 3 to the Bill.
The logic of the amendments is exactly as I have described. Given that the Committee has heard a lot about that, I will finish on that note.

Edward Davey: I am not surprised that the hon. Lady has been brief on this occasion, because this set of amendments is unsurprising. They remove important protections for consumers and the rest of the market, which the Opposition included in the 2009 Bill when they were in power. If I may pre-empt any intervention from the Opposition—particularly from the hon. Member for Kingston upon Hull East—the need for the protection of competition, which these amendments removes, is strengthened, because Royal Mail could end up entirely in private hands under this Bill. The hon. Lady has got herself into rather an odd position. When they were in government, the Opposition wanted regulation for a state-owned Royal Mail, but they are now arguing that there should be no regulation for a privatised Royal Mail. That is rather an interesting position, so I am not surprised that the hon. Lady has been briefer in support of these amendments.
This group of amendments would remove Ofcom’s ability to impose price controls through access conditions. Clause 37 ensures that proper protections are in place in the event that a dominant player abuses its position in the market, as we heard in discussing the previous group of amendments to the clause. It may be that Ofcom never has to use the powers under the clause; indeed, there are a number of hurdles that Ofcom will have to overcome before using them. In the previous debate, I made reference to subsection (4), which sets out some of those obstacles. If Ofcom could overcome those obstacles, it would make sense for it to use those powers, but it is properly constrained in the Bill. I discussed the circumstances in which Ofcom might have to step in to mandate access, and I will not go over that again. They are a limited set of circumstances, and decisions will be viewed through the prism of the fundamental duty to secure the universal service.
It is worth reminding the Committee that Ofcom can only mandate access where it is appropriate for
“(a) promoting efficiency,
(b) promoting effective competition, and
(c) conferring significant benefits on the users of postal services.”
That has got the balance right between protecting the universal service and competition, to which we keep having to return. The hon. Lady’s amendments would take the whole sense of balance away, and certainly do not reflect the judgments her colleagues made when they were in government.

Richard Fuller: My hon. Friend is right to point out the Opposition’s muddled thinking on the value of regulation in nurturing competition and the problems of regulation in stifling competition. I know that for Opposition Members, the idea of a public sector monopoly and bureaucratic fiat is preferable to freedom of choice and competition. There are some specific issues that the Minister was right to put in the Bill—we need to have them explicitly set out. Will he confirm that without the protection in subsection (5)(b), there is a potential for Royal Mail to manipulate prices so that competition is snuffed out, as there might not be enough margin to play with between wholesale and retail prices?

Edward Davey: My hon. Friend is absolutely right. In fact, he is just ahead of me—I am about to discuss that part of the clause. It speaks to the need for Ofcom to have such powers, and I want to discuss those in relation to the amendments, so we can see how damaging the amendments would be to competition.
The amendments would remove Ofcom’s ability to set price controls as part of an access condition. If Ofcom had sweeping powers, perhaps one could understand the need to restrain them, but we are talking about limited circumstances where Ofcom can use such price controls. It absolutely cannot do so unless it appears to it that the provider concerned—Royal Mail in the case of clause 37, but it could be any operator under clause 48—
“might otherwise fix and maintain some or all of its prices at an excessively high level with adverse consequences for users of postal services, or…might otherwise impose a price squeeze with adverse consequences for users of postal services.”
These are restricted conditions, but if there was a danger of such a price squeeze to snuff out competition, one would expect Ofcom to have the power to act. That is why we have put it in the Bill.
I am quite surprised that the hon. Lady wants to take that power away from Ofcom, particularly as the Bill is privatising Royal Mail. In many other amendments in other clauses, Opposition Members were worried that a privatised Royal Mail could seek to abuse its position. This is not terribly consistent with the story we have been hearing so far.
Let me finish by asking this: what might happen if Royal Mail abused its position and Ofcom did not have such a power? Prices for bulk customers could go up, meaning that more of them—such as insurance companies, banks and utilities—would move their mail away or communicate electronically through the internet. That would further damage a declining market.

Nia Griffith: Is the Minister suggesting that there would be some sort of price cartel—that Royal Mail’s commercial competitors would negotiate prices with it and fix them artificially high?

Edward Davey: No—quite the reverse. It is Royal Mail that would have the dominant position and would seek to exploit it. The competitors, however much they clubbed together, would be in a weak negotiating position compared with Royal Mail—if it sought to abuse its position and Ofcom did not have the powers that the hon. Lady’s amendment, if accepted, would remove. If Ofcom did not have those powers, access operators and private competitors would be forced out of business. Some may think that a really good thing, but I believe that appropriate competition that supports the universal service is good for consumers, driving efficiency and innovation.
I accept that it has been a testing situation for Royal Mail, but that is one reason why we have done some modest rebalancing in the Bill towards the universal service provider, compared with the 2009 Bill. We have taken account of the evidence gathered by Sir Richard Hooper and of the concerns expressed in our oral evidence sessions by Royal Mail, the Communication Workers Union and others. We have got the balance right, but the hon. Lady has gone to the other extreme. In all conscience, we could not take so many powers away from Ofcom and leave a private universal service provider in a position to abuse its dominance.
We have been clear that Ofcom’s powers are limited and that we prefer that Ofcom is required to regulate, particularly in the authorisation regime, by showing bias towards deregulation, which it has a track record of doing as a regulator. It has to ensure that it does not intervene in the market between private players, be they the universal service provider of postal services and another postal operator in this case, or be they other players that it regulates in other markets. In its DNA, Ofcom is designed to be a regulator that does not try to over-regulate. It is therefore a very appropriate regulator for Britain’s postal market today. Where competition is well embedded, it will enable more and more deregulation.
That is why the hon. Lady’s amendments are rather unwise. Although we are moving in the direction of more competition and more deregulation, and giving a clear signal that we want to go as fast as competition will allow—with a regulator whose DNA has a bias towards deregulation—we still need to ensure that the universal service provider, which certainly has a dominant position, cannot abuse that dominance. That is the fundamental balance that we have sought to strike. We have got it right; the amendments would take us in completely the wrong direction. Let me rephrase that—they would go too far and lead to an abuse of dominance, which we cannot accept.

Nia Griffith: The Minister has made some useful points, and he seems to understand that we see the protection of the universal service provision as very important. He feels that there are several safeguards to ensure that the regulator behaves in the most appropriate way. We are not entirely convinced, but there are now opportunities for Ofcom to intervene in the most difficult of circumstances. It is not terribly clear how much commercial negotiation can take place, but the Minister has commented that such matters might be left to the experience of Ofcom. On that note, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 37 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 38

Amendment proposed: 70, in clause 38, page 22, line 33, leave out ‘may’ and insert ‘must’.—(Nia Griffith.)

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 9.

Question accordingly negatived.

Question proposed, That clause 38 stand part of the Bill.

Gordon Banks: Before I start, I apologise to the Committee for not being here this morning. I had another 30-hour journey to get here.

Edward Vaizey: It was worth the wait.

Gordon Banks: Perhaps it will be later, at an appropriate point in time.
I am grateful for the chance to say a few words on clause 38 in the stand part debate. I am grateful to my hon. Friend the Member for Llanelli for holding the fort this morning. I am sure she did it as admirably this morning as she did last Tuesday morning.
Clause 38 relates to the accounting conditions that Ofcom may impose on a universal service provider to maintain separate accounts on different issues as directed by Ofcom. I have a few questions for the Minister. First, what will be the costs of the burden that he may be placing on private business? We have seen the Minister refuse to countenance any proposals in our amendments, often claiming a regulatory burden on private industry. I simply ask what impact assessment he has made of such a burden. Will Ofcom have to prove an overall benefit for the concept of universal service provision before imposing such conditions? If so, to whom?
In clause 38(2)(d), Ofcom “may” impose a condition requiring specified systems to be
“audited annually by a qualified independent auditor.”
Why is the independent auditing of such a condition “may” and not “must”? Will the Minister tell the Committee whether the auditors currently employed by a universal service provider for other areas of its business would be appropriate to carry out that work? May I also ask whether the issues laid down in such conditions, and indeed the criteria to which any audit would be carried out, would be made public? Or would they be subject to the judgment of Ofcom as empowered in clause 38(6) and (7)? Can the Minister advise the Committee whether Ofcom will be able to impose such conditions on different universal service providers at different times, so that one provider has to comply with an accounting condition but another does not? What is the hurdle that has to be failed to have Ofcom impose such a condition? Should we see the imposition of such a condition as an indication that Ofcom is not content with how a universal service provider is running that part of the business? Can the Minister also tell the Committee why it only “may” be necessary for the separate accounts to be published? What criteria will be used to determine whether publishing takes place?
Subsection (5) allows for Ofcom to impose the condition that the costs of following its requirement for a universal service provision to be independently audited are met by the provider itself, so if the provider was not charged with meeting the costs, who would be? What criteria would Ofcom use to determine whether a universal service provider should meet the costs itself? I hope that the Minister is able to answer those questions, and accepts that the inquiries are an opportunity for him to expand on some of the details in this part of the Bill.

Edward Davey: I think that I speak on behalf of all members of the Committee when I welcome back the hon. Gentleman. I had hoped to hear a little more about Edinburgh airport; we heard a bit about it in our proceedings last week. Perhaps we can hear more about how the hon. Gentleman’s Christmas shopping has been going, while he has been waiting for planes. That reminds me of this morning’s debate on the exceptions granted under clause 32 to the universal service provider on geographical or health and safety grounds. Clearly, exceptions need to be attached to a Member of Parliament if there is bad weather and they cannot come down to do their parliamentary duties. However, I digress.
Clause 38 sets out the accounting separation conditions that Ofcom may impose on a universal service provider, to assist in establishing cost transparency. We have to understand how difficult that whole notion is. Postcomm has been working with Royal Mail for a number of years to try to tease out the different cost allocation issues in the business. As a network business, many of Royal Mail’s products use common systems, such as sorting machinery, and so identifying the individual costs of particular products can be complex. Cost allocation and transparency has proved difficult, but if we are to answer some of the thorny questions that arise when we look at regulating a network business such as Royal Mail and at ensuring that price controls are fair for all parties, we have to get to grips with that issue. Some complicated accounting methodologies are applied, and I will not pretend to be an expert on them, but I want to stress to the Committee that cost allocation and cost transparency is a priority that needs to be addressed, to assist in monitoring the universal service, to help to set appropriate universal service prices for users, and to ensure that any access price controls are set so as not to provide an unfair subsidy to certain operators. That is what lies behind the clause, and it is why the clause is so important.
We have kept to how the clause was in the 2009 Bill, which is not surprising because the clause speaks to a requirement in the EU postal services directive. That directive has provisions requiring member states to ensure that the universal service provider keeps separate and transparent accounts. That is widely understood to be a knotty problem, and the regulatory regime in that area has to deal with it. So that Ofcom has the ability to require the universal service provider to establish cost transparency, clause 38 allows it to impose USP accounting conditions to maintain accounting separation across different services, facilities and products, and across different areas, and to require the USP to use particular accounting methods. The clause therefore includes quite a lot of flexibility. One or two of the questions by the hon. Member for Ochil and South Perthshire asked why we had “may” and not “must” and so on, but it is quite important that we ensure flexibility for Ofcom.
At the beginning of his remarks, the hon. Gentleman asked whether the burden would be expensive and what all the costs were. I am glad to hear him make such valid points, but our problem is that giving an absolute estimate to the Committee is not possible, because so many attempts have not quite got to the answer. We do not have an estimate of the cost of the accounting separation. We might have been able to give the Committee a cost but, despite a huge amount of work—I pay tribute to colleagues in Postcomm and the Royal Mail who worked on the area—that work remains ongoing.
Postcomm and Royal Mail are currently in discussion about how to handle the different approaches. Given disagreement on the methodology for allocating and sharing the costs between different products and services over the network, the Government would find it difficult to make the sort of impact assessment that the hon. Gentleman wants. In an ideal world, I would very much like to give him a figure, but given this developing theology about how it should be achieved, it would be very difficult—I think impossible—for my Department to give him that answer.

Gordon Banks: I am grateful to the Minister. He said nothing that I did not expect him probably to say but, basically, he said that he is imposing a burden on private business without knowing what the cost of that burden will be. It seems to me that that is something that he has resisted significantly throughout another hour of other batches of amendments. I am not saying that the objective of the clause should not be achieved. However, I had hoped for—but not expected—a little more detail from the Minister on what he envisages the cost might be, even in percentage terms, if for instance it was applied to Royal Mail as a whole at this time.

Edward Davey: I do not think that I can satisfy the hon. Gentleman with either a percentage or an absolute figure. The question is, what is worrying him about this? I hope he agrees that it is important for Ofcom to have the power. I hope he agrees that we need cost transparency and accounting separation in order for Ofcom to do its duty. They are a fundamental part of the regime—without them, Ofcom would not be able to undertake its regulatory duties properly, so they are important. I hope we can at least agree that the power should be in the Bill.
The hon. Gentleman might be worried—this might lie behind his question—that the burden seems an unreasonable one to put on the universal service provider and not on other postal operators. I understand that point and I hope to give him some satisfaction.
Royal Mail has a turnover of around £7 billion. Access competitors have only reduced that by around 2%—they are taking a huge volume of letters but, in terms of turnover, only around 2%. Asking competitors to pay for the audit would therefore seem to be an unfair burden to place on private operators. Given that the universal service provider is in a dominant position and has a special place—that is why it has to be regulated—it is not unreasonable for it to have to meet the requirements.

Gordon Banks: When the sale of Royal Mail progresses—if the Bill receives Royal Assent—we have talked at some length in Committee about the potential for many universal service providers. Has the Minister given any thought to when some idea of the cost of the burden might be determined? Will it be determined before any potential sale of Royal Mail?

Edward Davey: I genuinely wish that I could say yes. If we knew exactly what will be entailed, presumably we would have got to the answer. We would already have achieved accounting separation and cost transparency, and would be on the path to what some might describe as the holy grail. We would know the exact information that would resolve some of the disputes about whether the universal service is a burden or whether Royal Mail is subsidising the postal operators, as is alleged. We would have concrete information to enable us to answer such questions. Without wanting to be too much of an anorak on the issue, one of the first questions I asked officials when I came into office and was reviewing such matters in the early days was why had we not got to full accounting separation and cost transparency, as a result of which I was informed of a long saga.
I hope that I have given the hon. Gentleman some comfort that such issues are not easy. I do not pretend to understand the detailed cost accounting methodologies. Some people enjoy that sort of stuff, but it is not my idea of fun. However, it is critically important. I do not think that, overall, the costs involved are huge. If the hon. Gentleman is now worried about the size of the regulatory burden, although he was not earlier, it would not be large but it is critical that such work is done.

Gordon Banks: In his last few sentences, the Minister touched on what I was about to ask him. He does not regard such issues as having a negative impact on potential purchases.

Edward Davey: No. Any person operating a universal service provider would prefer to have no conditions, but if we are to make sure that there is competition and that the whole regulatory framework set out in part 3 of the Bill has some real teeth, we must have such a provision. Without it, we will not get very far. I hope that the issue is not one of controversy. I do not detect from the hon. Gentleman’s argument that he opposes the clause for philosophical reasons. He is rightly probing some of its detail, and I completely accept his questions. Perhaps I can deal with a few more.
It is right that Ofcom has the flexibility to decide in such unlikely circumstances, when there is more than one universal service provider, how it goes about implementing the accounting conditions. Instinctively, I would assume that they were similar. However, if one universal service provider were providing a universal service in a rather small area, the issues may be relatively different from those for the main universal service provider, which is providing the service throughout the majority of the country. One can imagine that Ofcom might approach that in a slightly different way, but I do not think that that should in any way concern the hon. Gentleman.

Gordon Banks: Would not that be potentially similar to what we heard just now when the Minister was comparing the figure of 2% and Royal Mail’s 98%? If there were a very small universal service provider, would it be fair for Ofcom to impose the accounting conditions?

Edward Davey: The hon. Gentleman is right to say that those are the sorts of questions that Ofcom would want to deal with. If, say—and I shall exaggerate to illustrate the point—the second universal service provider were providing a universal service to one island somewhere, clearly one would not want to impose the same sort of USP accounting conditions on it as on the main universal service provider, which would be providing a universal service to the 28 million addresses in the rest of the United Kingdom. I would assume that Ofcom would approach the imposition of the condition in a proportionate and justifiable way.
That sort of philosophy would underpin Ofcom’s approach in the circumstances. I am sure that if the approach were not proportionate, and if Ofcom could not justify it, one or both of the universal service providers would take Ofcom to judicial review. It would be in their interest, if Ofcom were not to abide by Hampton principles of regulation.

Gordon Banks: The Minister has created a scenario in which two different sets of accounting principles could be applied. Would not it be possible, therefore, for the end users to have some concern that the universal service providers were being regulated in two different ways?

Edward Davey: I do not think that they would be concerned, because they would want to be sure that regulation was appropriate and proportionate. This is an interesting theological discussion. I am not quite sure whether, in the hypothetical situation that we are discussing, there would be too much concern about how the powers in clause 38 were being used. Instead, let me bring the hon. Gentleman to the reality of what we are talking about.
Let us say that after the modernisation agreement the main universal service provider has 30 big sorting sites, with massive machines that are sorting mail at 40,000 items per hour—I think that is the rate. In other words, let us think about trying to apply cost-accounting methodologies to that universal service provider—trying to work out, in relation to the universal service products that are being sorted through the machines, how much of the cost of the machines and the labour and all the other associated costs relate to the universal service products, as distinct from those being sorted that are not in the universal service.
A comparison could be made between that level of cost transparency and the account separation and cost transparency requirements imposed on, say, a one-man band who was providing the universal service for an island—

Gordon Banks: Your house.

Edward Davey: Or my house, as the hon. Gentleman said. I think one can readily see that different methodologies would have to be applied, and I do not think that that would cause any third party any consternation. It would be ludicrous if the same approaches were applied to both universal service providers.

Gordon Banks: The principles should be the same. The details might be different, but the overarching principles should be the same.

Edward Davey: The need for separation and transparency should be the same, and the approach to regulation—the principles behind how Ofcom decides to regulate the two different universal services—should be the same. I guess that the hon. Gentleman is right: but the way those principles would be applied in reality—because it could be a matter of dealing with two very different circumstances—would be different.
I shall deal with the hon. Gentleman’s other questions. He asked why we should insist on an independent auditor if the condition is only a “may”. Let me reassure him. If Ofcom decides to impose an accounting condition, then it will be appropriate for the accounts to be properly and independently audited.
The hon. Gentleman asked whether Royal Mail could use its normal auditors for accounting separation. Subsection (8) sets out what is meant by an independent auditor. I am not aware of any reason why it should not use its normal auditors as long they meet the definition in subsection (8). I do not know whether the hon. Gentleman has a problem with the definitions set out in subsection (8). They were mirrored in the 2009 Bill. To me, they seem fairly straightforward definitions and they do not unreasonably restrict Royal Mail.
The hon. Gentleman asked—we had to come back to our musty set of amendments from two or three sittings ago—why we were using “may” and not “must” in the clause. Subsection (1) states:
“OFCOM may impose a USP accounting condition on a universal service provider.”
We had the debate about “may” and “must” in some detail earlier. I refer the hon. Gentleman to the remarks that I made some days ago. If Ofcom thinks that it is necessary, then it may impose an accounting condition. Let us imagine how the mail market may evolve. One can imagine that many years hence we will be looking at a completely different market. The user needs and the structure of the markets could have changed and in that situation, Ofcom might feel that it is unnecessary to impose such conditions. In circumstances that we cannot yet foresee, it might feel that it would be disproportionate and not justifiable to impose such conditions and, therefore, it would choose not to. I must say, though, that is quite a long way off. Given that we have yet to reach the holy grail of accounting separation and cost transparency with respect of this particular network, he does not have much to worry about unduly.
I conclude by saying that Ofcom may require the application of presumption on fixing the determining costs, and the universal service provider to publish accounts or other information required as a result of these provisions. Such publication would provide transparency to the market and assist in the discovery of any areas of inefficiency. At one stage, the hon. Gentleman was worried about how Ofcom would go about publishing this and whether it was appropriate. It is all in the name of transparency. It is important that the wider market of postal operators can see that. They are the ones who are being charged for access to universal service providers downstream and, therefore, it seems to me reasonable that Ofcom can decide that that information should be published.

Gordon Banks: For clarity, why should not the accounts be published? Why is it only “may” and not “must”?

Edward Davey: We are going back to our famous debate about mays and musts. If the original decision about whether this accounting condition should be imposed on a universal service provider is a “may”, it follows, therefore, that whether they publish should be a “may”. There could be a reason why Ofcom would not want them published. It may be that it may choose to publish part of the information. Ofcom may decide that parts of this information are genuinely commercial and confident and would want to keep them out of the public domain. That shows why it is important that Government, and this particular Bill, do not set all of this in stone, but give Ofcom flexibility, as we discussed at length some time ago.
Ofcom may secure USP’s compliance with the cost accounting system that is audited annually. Annual audits would be a sensible approach, but Ofcom must decide whether it wishes to do that. It can do that at the universal service provider’s expense, not at Ofcom’s or the taxpayer’s. Ofcom must ensure that any regulatory conditions are objectively justifiable, do not unduly discriminate and are proportionate and transparent.

Gordon Banks: Just before the Minister finishes, he has not addressed the issue of the costs of the independent audit. The Bill says that Ofcom may require the universal service provider to meet them. One of my original questions was that if the universal service provider is not responsible for the costs, who is, and what criteria would Ofcom use to determine that someone else—presumably itself—would be responsible for them?

Edward Davey: If I have understood the hon. Gentleman’s concerns, Ofcom has the power to get the universal service provider to meet the cost of the audit. I think the presumption is that that would happen. However, referring back to our “may” and “must”, it is trying to give flexibility. I guess it is possible for Ofcom to decide that it would pay for the audit itself. I think it is highly unlikely, but it has the power to recover the costs. As we go into other parts of the Bill, we have generally tried to ensure that any costs involved with this aspect of transparency are recovered by the key players involved rather than falling on the regulator or on the Government. That is the right approach.

Gordon Banks: So the Minister does not see a position developing where Ofcom will require this practice to be carried out, but that the costs are met by Ofcom and not recovered at any stage by Ofcom from the universal service provider. Does the Minister envisage that the cost will always be recovered from the universal service provider, either directly from a reduction in its accounts or by other costs that Ofcom will levy on it?

Edward Davey: The way in which I understood it is that the universal service provider, in meeting the USP accounting conditions, would have to ensure that there is an independent auditor, following subsection (8), and that Ofcom could ensure that those costs were met by the universal service provider. That, I imagine, is the default position—I feel increasingly confident that that is so. Unless the hon. Gentleman has any other concerns, I beg to move that the clause stand part of the Bill.

Question put and agreed to.

Clause 38accordingly ordered to stand part of the Bill.

Clause 39

Question proposed, That the clause stand part of the Bill.

Gordon Banks: The Minister enticed me to give the Committee slightly more details on my recent escapades. This time, most of the 30 hours were spent on the M9, and not in Edinburgh airport, so that was even less pleasant.
I would like to make a comment on the clause, rather than ask the Minister a particular question, although I am perfectly happy to hear his response. The clause defines the meaning of services within the scope of the universal postal service, and subsection (1)(b)(ii) highlights that the clause applies if
“the service is not provided throughout the United Kingdom”.
I do not suppose that any of my hon. Friends object to the measure being imposed on such a provider, but I would like to highlight to the Committee that the words acknowledge the likelihood of a break-up of the universal service provisions throughout the country. That is a matter that concerns me and my hon. Friends, and something that we have raised in various debates at different stages in Committee. I do not think we will take any comfort from the potential impact and direction of Government thinking in such words being in the clause. The possibilities highlighted in the clause make our worst fears, including the challenge to the Post Office as a front office for Royal Mail, more of a reality. I would like to hear Minister’s response to the concerns emanating from the words in the clause.

Edward Davey: I am slightly concerned by the hon. Gentleman’s comments and I hope that I can reassure him. I am glad that he is no longer on the M9—there was some speculation that he was trying to get back from Zurich after trying to help with the Word cup bid, given his namesake, but clearly he was doing his constituency duties.
The hon. Gentleman seems to have misinterpreted clause 39. He suggests that we have included it because we were envisaging the break-up of the universal service and that it is a disaster for the post office network. That is not the case and is not the clause’s purpose at all.
One has to consider whom we are regulating in part 3. There are three tiers of regulation. The first is that of the universal provider, which is Royal Mail—the incumbent. It is envisaged in clause 34 that there could be more than one such provider, but that would be in only very specific, limited circumstances, as we discussed this morning. The main and top tier of regulation is the designated universal service provider.
The second tier is the set of other postal operators, which is what we mean by “persons providing services”. Such operators provide services within the scope of the universal postal service and are not, therefore, other USPs; they are competitors to the main USP. They are competing within the scope of the services that are envisaged within the universal service—whether that be from the minimum requirements or from the universal postal service order. Effectively, the measure ensures that Ofcom has the ability to regulate USP competitors.
When we debate clauses 46 to 50, we shall discuss the third tier of regulation, which concerns postal operators generally. Such operators could be postal companies that are not operating, particularly, within the scope of the universal service, but are clearly postal operators. For example, they could be express couriers, who specialise in carrying very heavy parcels that are not included in the universal service, or other postal operators, who provide services that fall well outside the scope of the universal service.
It is important to understand that there are three tiers of regulation. I reassure the hon. Gentleman that clause 39 concerns not USPs, but postal operators who are within the scope of the universal service. Sometimes we can sound tautologous in the way in which we bang these phrases around, but I hope that I have made myself clear. If I have, I hope that he will accept that the clause should stand part of the Bill, and that the Committee will agree.

Question put and agreed to.

Clause 39 accordingly ordered to stand part of the Bill.

Clause 40

Amendment proposed: 108, in clause40,page24,line10,at end insert ‘OFCOM shall exercise its power under subsection (1) if it considers that the provision of a service within the scope of the universal postal service by a person other than the designated universal service provider may impede the ability of the designated universal service provider to comply with its universal service obligations.’.—(Nia Griffith.)

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Nia Griffith: I rise to speak briefly on clause 40, particularly subsection (3) and its link with clause 44. We have already discussed the difficulties with getting that transparency for Royal Mail’s accounting. Can the Minister enlighten us on the expected timetable of when that accounting and the cost of the universal service provision will become clearer? That will be relevant if privatisation goes ahead. How will a prospective purchaser regard the purchase of Royal Mail without that particular information? Can he give us some indication on that timetable? Secondly, the mechanism for surcharging the competitor organisations, if it became necessary to shore up the universal service provider, is complicated. The provisions of clauses 40 and 44 are designed to do that. Are there any other models, either in this country or abroad, where that sort of process takes place? How successful have those models been?

Edward Davey: I am grateful to the hon. Lady for her questions. She referred back to the previous clause and how long we expect it to be before there is definitive accounting separation and cost transparency, when we can therefore fully understand the cost of the universal service. One would hope that we could get that rapidly. I would not want to put a date or a timetable on that, because getting complete independent agreement with the regulator has proved difficult up to now. The idea that we will be able to magick them up next year or the year after or have a specific timetable would be ambitious. I hope that we can determine the costs quickly—it is important. No doubt many estimates will be made of the different costs involved. There have already been some estimates. It is not as if people do not have views; it is just that it is inherently difficult to make those estimates. There have been a number of assumptions based on different methodologies. Different people want to put different elements and different interpretations on the methodologies that suit their own purposes.
Let us remember that a lot of money is at stake here. A competitor might have a different approach to the one taken by the regulator, which might have a different approach to the universal service provider. Inevitably, they will want to put the best gloss on it, which either increases or decreases the costs, depending on where their interests lie. I hope that the hon. Lady understands how inherently difficult it is. While a huge amount of work has been done in this area, and while there are people in the country who say that they know what the universal service costs, getting to a consensus on that is likely to take some time. I hope that it can be done more rapidly than we have seen in the past, but we cannot be absolutely sure.
The hon. Lady’s second question related to the compensation fund, which is foreshadowed in clause 40 and is discussed in the subsequent clauses, in particular clause 44. She asked whether there were any other models. We are certainly not aware of any other models for the compensation fund. It is only one of the options set out in the directive, and the provisions in the Bill mirror those in the Communications Act 2003 for telecommunications, so this is a sort of genesis of the proposals. I am sure the hon. Lady is aware that the compensation fund idea is not something that we dreamt up. It was in the 2009 Bill and it is in the directive. It is not unheard of. In many ways it has been a central proposition in postal economics for many years. That is how one would deal with the “unfair burden” that the universal service provider has to meet.
There have been debates about whether compensation funds should be paid for by the taxpayer or by competitors. In the Bill we have decided, as is standard in the directive, that it should be competitors. Then, of course, there are arguments about who those competitors should be and how we define within regulations who should come under the regulation that would link to the compensation fund. There are all those sorts of questions, which no doubt will be teased out in due course. The model that we have gone for is a standard model. We have not gone for anything particularly unusual. With that reassurance, I hope that the hon. Lady will support clause 40.

Question put and agreed to.

Clause 40accordingly ordered to stand part of the Bill.

Clause 41 ordered to stand part of the Bill.

Schedule 4

Question proposed,That the schedule be the Fourth schedule to the Bill.

Gordon Banks: Schedule 4 is quite long. It covers the recovery of administrative costs incurred by Ofcom. It allows Ofcom to impose different costs on different operators provided that they do not exceed Ofcom’s overall costs in carrying out its duties—I presume that Ofcom cannot make a profit. I can grasp that it may be more costly to regulate one part of the service than another, which brings us back to the concept of splitting the service. Schedule 4 seems to pose a difficulty in that there may be different levels of charges to providers delivering a service in the same section of provisions—letters, for example. If I am wrong, I am sure that the Minister will point that out in his closing remarks. However, if I am right, how will the charges be determined on a provider-by-provider basis?
Paragraph 1(5) of schedule 4 informs us that Ofcom must publish a financial statement setting out the total charges received that year, the total charges outstanding that year and the cost to Ofcom of carrying out its postal services functions. That is important, relevant and necessary information. Will the Minister expand on whether Ofcom will provide a breakdown of the charges received on a company-by-company basis rather than simply an overall figure, as I read it at present? Or will it be necessary to publish figures on a separate basis—for example, letters separate from parcels?
As I have said, paragraph 1(5) of schedule 4 informs us that Ofcom will publish the total amount of charges outstanding that year in its financial statement. Again, will the Minister state whether that will be on a provider-by-provider basis, and if not, why not? Will he describe the circumstances that could lead to such charges being outstanding? I note that the surplus or deficit will be carried forward into the following year’s charges, and those charges will be adjusted accordingly. Will that be done within Ofcom on a sector-by-sector basis, such as letters, parcels or packets, as designated in clause 26? Or will it be less discriminatory and perhaps lead to a particular sector overpaying or another sector underpaying?
In respect of Ofcom’s ability to impose a penalty on a person acting in contravention of a requirement to pay the charge outlined in paragraph 1 of the schedule, what criteria were used to determine the restriction to limit the charge to twice the amount of the charge fixed for the year in which the contravention took place? What processes will be incorporated by Ofcom in determining how to levy that charge? Where in the scale of its management will such a decision be taken, and will it need approval by the board? Paragraph 7 allows Ofcom to suspend an operator from providing services. In such a situation, what safeguards are in place for ensuring the provision of service in the area covered by the suspended universal service provider? With that, I am happy to listen to what the Minister has to say.

Edward Davey: The hon. Gentleman has got me.

Gordon Banks: I wish it had been an amendment.

Edward Davey: If it had been, the hon. Gentleman would not have got me, but perhaps he should try the surprise approach more often by bowling a googly without giving me any notice. I must confess that I am not sure of the answer to some of those questions, including at what level Ofcom would decide how the charging operation worked. I shall try to deal with them, but if I fail to, I will certainly write to the hon. Gentleman. In general, however, some of the answers to his detailed questions have probably not yet been worked out in my Department or in Ofcom, although they may—I am sure that they will—learn lessons from how Postcomm operates its regime.
My hon. Friend the Member for Pendle keeps saying from a sedentary position, “Postcomm;” he does not like the pronunciation, “Posstcomm.” This is a theological question, like “schedule” and “skedule.” I am a “schedule” man—I do not know about you, Mr Amess—and I am happy to be a “Posstcomm” man on this occasion.
On Ofcom’s operation of the charging regime, it will learn from experience, and if the hon. Member for Ochil and South Perthshire has particular suggestions or proposals about how that should be done, I am sure that it will be keen to hear from him.
I will broadly outline what the schedule is intended to do, while inspiration arrives. The schedule’s core function is to set out how Ofcom can recover its costs in relation to its postal functions. It allows Ofcom to fix a charge that postal operators providing postal services within the scope of the universal service must pay. It is important that that does not apply to operators outside the scope of the universal service, for the good reason that they may only be small companies and doing a small amount of business, so it would be unfair, unjustifiable and disproportionate to ask them to pay costs. The charges that would fall under the schedule are targeted only on those operators within the scope of the universal service.
Ofcom is allowed to fix a charge only when it has made a statement of the principles that it will apply in fixing those charges, and the charge must be fixed in accordance with those principles. There will, therefore, be a lot of transparency about how the charges are made. The principles must be such that Ofcom believes that, on a year-by-year basis, the total amount of charges payable meets, but does not exceed, the annual cost it occurs in carrying out its postal functions. The principles must also be objectively justifiable, proportionate and transparent, as the hon. Gentleman would expect. The charges can be different for different types of operators, and certain descriptions of operators may be excluded from the liability to pay. As long as the principles are met, that seems an appropriate way forward. That deals with the hon. Gentleman’s point about whether the charges will be done by company or by sector.
Ofcom is required to produce a financial statement at the end of each charging year, setting out the charges that it has received, the charges that are outstanding and the cost to Ofcom of carrying out its postal services functions. Any deficit or surplus must be carried forward when determining charges for the following year. The schedule sets out the meaning of Ofcom’s postal services functions, including incidental functions as defined in paragraph 2(3), such as any preparatory or facilitating steps taken by Ofcom before and after the schedule comes into force.
The schedule also details the different steps that Ofcom may take if an operator does not pay the administrative charge—I think that the hon. Gentleman is concerned about that—and allows for proceedings to recover the charge and for the imposition of financial penalties. The final step that Ofcom may take is to suspend or restrict the entitlement to provide postal services, and the hon. Gentleman wanted to know what criteria would be used in making that decision. Returning to my initial remarks, I do not think that those criteria have yet been decided, but no doubt when Ofcom sets out the principles, as required under the schedule, it will give some thought to how the penalties will be applied under them.
I confirm that Ofcom cannot make a profit from regulatory fees. As I have already said, costs must be applied on a transparent, non-discriminatory basis, and Ofcom will set out all the details in its published statement of principles. I am happy to send the hon. Gentleman a copy of Ofcom’s existing statement, which is in the public domain, of charging principles as they apply to telecoms, for his study and enjoyment when he is on the M9 or in Edinburgh airport. I am sure that many of the principles set out for telecoms will read through to postal services.

Gordon Banks: I want to take the Minister back a minute or two to when he was discussing the revocation of the ability to provide a service. I asked in my opening remarks what would happen to that geographical or service area if the ability of the provider was taken away by Ofcom. Who would then provide that service to that area?

Edward Davey: I need the hon. Gentleman to clarify his question. We are talking about the charging regime for Ofcom, and about how Ofcom charges different postal operators to ensure that it is funded, and funded through the industry not the taxpayer. That is a completely separate point to how the universal service is provided.

Gordon Banks: I understand that paragraph 7 allows Ofcom to suspend an operator from providing services. If that came about, presumably for non-payment of charges, what would happen to the provision of services in that geographical area?

Edward Davey: I am now with the hon. Gentleman. He refers to postal operators that might be providing a service within the scope of a universal service but are not the universal service provider. The universal service provider is the one that has to provide the universal service under the duties set out in clause 28, with Ofcom ensuring that that happens. The suspensions for non-payment that the hon. Gentleman is worried about will not apply to the universal service provider but to the other postal operators. There is no hidden threat or danger to the provision of the universal service, and I hope that that reassures the hon. Gentleman.

Gordon Banks: I am glad that I have eventually delivered the Minister a googly during the length and breadth of the Committee. It was brought about by his destroying my faith in Santa Claus in a previous sitting. With all due respect, the Minister is wrong, because Santa Claus was in Alloa on Saturday, and I have a photograph of me with him.

Question put and agreed to.

Schedule 4 accordingly agreed to.

Clause 42

Nia Griffith: I beg to move amendment 118, in clause42,page25,line35,leave out subsection (10).
I really do not know how to follow that.
Subsection (10) is strange. It states:
“Unless directed to do so by the Secretary of State, OFCOM may not carry out a review under this section before the end of the period of 3 years beginning with the day on which this section comes into force.”
We want to explore with the Minister why that aspect of the negotiations, provisions and new set-up is subject to such a time limit. Our amendment would delete the subsection, which would bring in an arbitrary action in respect of one aspect of the work undertaken by the regulator.
Under the Bill, Ofcom may not carry out a review of the costs of universal service obligations for at least three years after the clause comes into force. What exactly is the reasoning behind that? We have heard discussion today about the need for transparency in accounting. We must sort out what the universal service obligation will cost and what the costs incurred by the universal service obligation provider will be. If Ofcom will be regulating that market, we will have to see greater transparency of the costs, so why does the clause seem to stop Ofcom from getting on with that work?
It strikes us, particularly with different patterns by which people use mail services and the decline that we have heard about, that there could be a rapidly changing scenario in respect of the costs for the USP. It is a bit odd that we have a particular limit on an aspect of Ofcom’s work. Why is it that Ofcom cannot carry out a review earlier, unless it is directed by the Secretary of State? Surely, given the types of comments that we have heard, the Minister would have wanted Ofcom to have had the discretion to be able to choose when it wanted to review the costs. It is strange to prevent the regulator from establishing costs for regulatory purposes before the three-year period is up, because there might be difficulties. We will have to examine what the USP will be up against, and it will be important to discuss whether the costs are being met and whether the right regime is in place.
The provision is of a slightly arbitrary nature. We heard the Minister arguing about the importance of the regulator having the freedom and independence to act as he wishes, but under the clause the regulator is subject to a particular restriction and to a requirement for him to return to the Secretary of State if he wishes to review matters earlier. Surely the larger the amount of information gathering that takes place, the better. Given the particularly difficult circumstances that the provider of the universal service obligation might be working under, Ofcom would want the flexibility in case revisions and a review of the costs are required or if it wants to start looking at things sooner.
Mention is made elsewhere in the Bill of periods of 12 months or 18 months for the review of regulations, so it is strange to have the three-year rule under the clause, given the implication that, almost as soon as the Bill is enacted and Royal Mail is privatised, the opportunity will be there for Ofcom to start revising and looking at things. Will the Minister give us a little bit of his wisdom and enlighten us about the thinking behind the measure? Why has subsection (10) been made part of the Bill?

Edward Davey: I am grateful to the hon. Lady for precipitating the debate, because it gives me a chance to explain the rationale behind the clause, if it is not immediately clear to the Committee.
Let us remember the overview. We are not talking about the work being done on understanding the costs involved of the universal service. A lot of that work will be done, as we have seen in our debates, as part of cost accounting and cost transparency—that is important for Ofcom and its standard duties as a regulator. Under clause 42, we are talking specifically about whether a financial burden is involved. We have to read subsection (1) carefully:
“OFCOM may from time to time review the extent (if any) of the financial burden for a universal service provider of complying with its universal service obligations.”
We are not looking specifically at the cost of a universal service. That needs to be done in the normal course of events—we have those provisions in clause 39. In clause 42 we are looking at whether a universal service obligation is proving to be a financial burden.
The reason why we have a three-year delay is simply because we want to ensure that the modernisation agreed between the Communication Workers Union and Royal Mail continues and that no one believes in some sort of get-out clause—that Royal Mail does not have to modernise or become more efficient, that it can just wait until Ofcom does a review about the unfair financial burden of a universal service and that a compensation fund is miraculously created, coming to the aid of Royal Mail and bailing it out. We would not want to put into the regulatory framework any perverse incentives for Royal Mail not to become more efficient.

Nia Griffith: I am perturbed about what the Minister has just said. The implication is that anything that goes wrong, as far as Royal Mail is concerned, must be to do with what is going on inside Royal Mail—possibly the trade unions or management, although he did not mention management on this occasion. What about external factors making circumstances very different? Those could be anything from escalating fuel costs to a completely different approach to dealing with mail—we have not yet got “Beam me up, Scotty!” but one never knows.
Three years seems a long time to be unwilling to look at any possibility that the burden might have been caused by anything other than what Royal Mail has brought on itself—that is what the Minister seemed to suggest—by sitting back and hoping that someone will come along, pick up the pieces and bail it out. That is an image of a helpless Royal Mail, always hoping that it will be picked up, put back on its feet and subsidised by someone else. I hardly think that that is the image that we should have of this dynamic organisation, which we have seen is modernising at a huge pace. The Minister believes that it might be given even more dynamism by being privatised.

David Amess: Order. Interventions must be reasonably short.

Edward Davey: I was enjoying the hon. Lady’s speech—she was doing so well that I left it to you to bring the intervention to a close, Mr Amess.
Let me be absolutely clear: we do not believe that Royal Mail will want to avoid its responsibilities. I am sure that it will want to press ahead with its vital modernisation, working in close partnership with the unions to deliver on the modernisation agreement. We expect that to happen—I would even go as far as saying that it must happen. We have to see efficiency improvements. The modernisation agreement is very welcome, and I hope that it delivers on those efficiency improvements. It would be wrong of the Government to create a regulatory framework that created poor incentives. If there were a compensation fund available to Royal Mail on day one, the incentive to press ahead with the modernisation agreement might be somehow weakened. That is not to cast aspersions on Royal Mail and its employees by saying that it has poor motives or poor aspirations. It is just that it makes sense that the compensation fund should not be available on day one. Waiting three years for this review is the sensible way forward.
Let us remember that competitors and customers will effectively pay for any compensation fund, were it decided that it was necessary after the review. They need to be reassured that they are not paying for Royal Mail’s inefficiency. We therefore need to ensure that there is not some immediate get-out clause for Royal Mail. I hope that the hon. Lady understands that this is not an attempt unnecessarily to bind the regulator. She is right that in many other clauses we have emphasised the importance of regulatory flexibility and of the regulator making its own decisions. That has not always been the case—I refer her back to clause 33, where we were discussing a review of the minimum service requirements. Explicitly, the Secretary of State and Parliament will decide whether the minimum service requirements can be changed.
In other parts of the Bill we have made it clear that Ofcom is not running the show completely. In this case, we think that Ofcom would welcome the tying of its hands, because it wants to ensure that the incentives on the universal service provider to be more efficient are right. That is part of Ofcom’s duties, as we discussed in clause 28. Ofcom would not, therefore, want anything to be built into part 2 that would prevent the delivery of the modernisation agreement. I hope that the hon. Lady is reassured by that.
I will make a few more comments to reassure the hon. Lady, and then I will return to some of the thinking behind this, particularly the rationale behind this subsection. I hope that she agrees, as I think she has on past occasions, that for the universal service to survive, this provision needs to be more efficient. That was Richard Hooper’s conclusion, and that is the basic starting point for the whole Bill. The 2009 Bill had the same starting point as well, so a lot of this is common ground.
Like the hon. Lady, I accept that Royal Mail has been making huge efforts to modernise, and there has been some progress on that. If the universal service provider does not have the right incentives to continue with that work, the truth is that without greater efficiency the cost of the universal service will continue to rise. That will mean more switching to alternative forms of communication, which will become ever more attractive, and more decline in volumes. We could reach a point where there is no way back for the industry and the universal service. I want to keep stressing the importance of improving efficiency in Royal Mail.
I have seen, as I mentioned in previous debates, some of the excellent work that has been done. We have talked a lot about the Gatwick mail sorting centre. Perhaps that is where we ought to have our Christmas party to celebrate the return from the snowy north of the hon. Member for Ochil and South Perthshire, who believes in Santa Claus, so we can see for ourselves the strides forward that are being made in efficiency and how much more there is to do. If every sorting centre learned lessons from Gatwick, we would be moving forward.
I do not believe I have told this anecdote before: I was talking to some Royal Mail employees at the Gatwick centre about how they have taken strides forward and improved efficiency. They were frank and open with me, with the managers agreeing with them. As they are now adopting some Japanese management techniques and working closely together, they have decided to co-operate on a basic analysis of the processes that they undertake every day. When they started that, they recognised that the machines—some of the sorting machines are 19 years old, and are not exactly cutting-edge technology—were breaking down frequently. Clearly that was not efficient. It was increasing the unit costs of sorting a letter, and they wanted to try to reduce the down time of the machines to increase productivity and efficiency.
They came to a joint and startling conclusion that it would be a good idea to clean the machines. They did, and they now maintain the machines in a way that the machines have never been maintained before, which has significantly increased productivity. The machines do not break down as often, and what was interesting and, I think, hopeful for the whole way that world class mail is rolling out is that the involvement of the employees in maintaining and cleaning machines in a way that had not happened in the past has improved the enjoyment and autonomy of the individuals working on those sorting production lines. They have started naming their machines. [Interruption.]I think they have rather more usual, standard names.
I am trying to remember the name of the machine that we looked at. I think it was Sue. Having been cleaned, Sue was performing more effectively. It was interesting. The employees were almost like car mechanics. They were now more attuned to the sounds that the machine made and could tell and follow effectively and more quickly if a machine was not functioning properly. Rather than calling in engineers, they themselves were tackling some of the problems, and they were monitoring the effectiveness of each part of the machine—they are long machines, with many different parts. Each individual employee working on the sorting machines got to understand how their bit worked, and they were monitoring the efficiency of each part of the machines.
The anecdote was not simply to allow the Whip to get to his place; it was also to express the fact that Royal Mail can make leaps in efficiency. We do not want the pressure to be taken off it to continue to deliver on greater efficiencies, which are absolutely critical. That is why there is this three-year period before the review can be made. I hope that the hon. Lady will understand that analysis and withdraw her amendment.

Nia Griffith: I think the Minister has made our case for us. He has described in such wonderful terms what we have heard, in rather more boring terms from the sources of information that we have had, about improved relations in Royal Mail—Hooper makes a point of stating that in his September report, and witnesses in our evidence sessions said the same. However, the Minister forgot to give the amendment a name. Bearing in mind that lovely picture of the Minister—the dwarf or the elf—visiting the machines that were being cleaned, and the idea of those little creatures he sees in his imagination sorting out Santa’s mail, there is only one thing we can do, which is refer to his comment this morning and call it the elf and safety amendment. That is the Minister’s joke, not mine. Does the Minister wish me to give way?

Edward Davey: No. The hon. Lady tells the joke far better.

Nia Griffith: Let us return to the serious business. We have a Royal Mail that is modernising apace. We have had a good report, both from Hooper and from the witnesses in the evidence sessions. We understand that it is modernising not because somebody is about to offer it a great subsidy, but because relations have improved and there has been a real determination on the part of management and the work force to work together. So often, it is the people who are directly involved who know how to make processes more efficient.

Edward Davey: Does the hon. Lady agree that the modernisation agreement must be implemented and adhered to, and that it is important that the pace of modernisation is maintained and, if anything, accelerated?

Nia Griffith: Certainly. Those people who are directly involved are the best placed to judge and they seem to be very much in favour of continuing the modernisation programme and moving forward apace.
That brings me back to comments about clause 33, which concerns what we, as consumers, want—the minimum requirements and when they might be reviewed. The Secretary of State, indeed, may wish to have a distinct influence over those important provisions.
Clause 42, however, deals in much more subtle detail with the ins and outs of the financial burdens. It concerns how such burdens might be viewed in relation to other costs and the other competitors, whether that is realistic, and whether that is Royal Mail’s fault or somebody else’s. The regulator should have the freedom to choose when and how a review is made, which would be in keeping with the other responsibilities that we expect the regulator to undertake. For that reason, I wish to press the amendment.

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Clause 42 ordered to stand part of the Bill.

Clause 43

Nia Griffith: I beg to move amendment 119, in clause43,page26,line25,leave out from ‘burden’ to end of line 26.

David Amess: With this it will be convenient to discuss the following:
Amendment 120, in clause43,page26,line27,leave out subsections (9) and (10).
Amendment 109, in clause43,page26,line36,at end insert—
Amendment 110, in clause43,page26,line46,at end add—

Nia Griffith: I shall speak to the amendments together. To translate amendment 109 into simpler language, it concerns who the provider of the universal service obligation should be and for how long. The suggestion that it should be 10 years is to try to give stability to the provider, who in the first instance is most likely to be Royal Mail. At the moment, there is not a serious suggestion that any other company could provide the delivery of the universal service obligation in the near future. To fulfil the universal service obligation, it is obviously necessary to have a comprehensive set of mail centres, delivery offices, large fleets of vehicles and other substantial capital requirements—and, of course, the work force.
Despite the introduction of a liberalised mail market, no competitor of Royal Mail has yet considered making the type of investment that would be required to provide the universal service obligation in reality. Some of them would be happy to skim a little cream off from the universal service obligation, because there are areas where they would like to do the work. They feel that they would make a good job of it and do it in a competitive fashion, but that confirms the point that none of them has the wherewithal at the moment to sustain a universal service obligation.
Nor is the provision of the universal service obligation simply a matter of capital investment and large-scale employment. Royal Mail embodies generations of expertise and innovation from those who have worked for it or managed it. That is why, despite the continued physical expansion of the universal service obligation to more than 28 million addresses today, Royal Mail’s quality of service figures are at record levels. Let us be realistic and accept that the universal service obligation, which the Government say they want to protect, can be delivered only by Royal Mail at the moment. The amendment acknowledges that simple fact. It also gives Royal Mail the certainty to make investment and business decisions, confident that it will remain the universal service provider for a reasonable amount of time. In business terms, 10 years is not long. The replacement of complex machinery operates in cycles of eight to 10 years, unless, of course, the 19-year-old machinery is given that wonderful clean-down by the Minister and employees.
We all know that something such as the universal service obligation involves massive investment. If that investment is made, there needs to be certainty for investors in the business that there will be at least a 10-year period in which Royal Mail will be the universal service provider. I hate to mention this, but sub-postmasters are still looking for that inter-business agreement to be 10 years. For business, 10 years is not a hugely long time.
The amendment seeks to deliver a realistic scenario in which Royal Mail, if it is the universal service provider, will be able to invest for 10 years rather than wondering “shall we or shan’t we invest, because we might lose the service after a short amount of time?” Or there might be cherry-picking going on, which would mean losing parts of it. Therefore it would not be worth its while investing and pushing ahead with—dare I say it?—the modernisation programme.
Linked into the matter is our amendment 110 in clause 43. It specifies that
“A direction under subsection (12) must specify that a minimum of three years’ notice be provided to a designated provider”
of the universal service obligation
“before any other operator may commence providing any of the postal services required to be provided by the universal service obligations.’.”
It is about planning ahead, and businesses having to decide what they will prioritise and where their investment will be. It would give some certainty either to the provider that it will no longer be the provider and therefore must make other provision and look elsewhere, or that perhaps it will not be the provider for the entire universal service obligation but for only part of it. In such circumstances, the new provider would have the time to make the necessary investment, get up to speed and be ready to provide the service with a seamless handover.
The amendment would offer protection to the universal service provider by making sure that adequate notice is given, should that provider have the service taken away and offered to another operator. Clause 43 allows Ofcom to draw a conclusion that the universal service obligation poses a financial burden on the universal service provider, although it does not guarantee that the universal service provider would have to agree that assessment before Ofcom acts. The matter is entirely at the discretion of Ofcom, which would then report its recommendations to the Secretary of State for action.
The Secretary of State might then direct Ofcom to take action. Again, the Bill offers the universal service provider no guarantee that it will necessarily agree with the course of action recommended by Ofcom, endorsed by the Secretary of State and then implemented by Ofcom. We are trying to make sure that there is a proper opportunity for the planning that could be necessary if there were to be a change in the universal service provider. There might be various attempts, for example, to make the USP provide things a lot more cheaply. Other pressures might be put on the universal service provider in different ways. We want an element of stability and a proper transition period, so that if a different provider were to be chosen, the original provider would have a proper period of notice and anyone taking on the service would obviously have time for a lead-in period. We are saying that, in business terms, if we are to expect people to do the job, we have to make sure that it is worth their while. We have to give them something like a 10-year period in which to do it and, if we are to make a change, we need time for people to withdraw and further people to be put in place so that there is a proper notice period.
Amendments 119 and 120 are about the proposed power for Ofcom to make a procurement determination. Amendment 119 would remove the proposed power from subsection (8), and amendment 119 suggests that subsections (9) and (10) be left out. The proposed power seems to be an innovation under the Bill. It is an element that could easily seek to undermine the universal service obligation. It means that competitor mail companies that are keen to lobby Ofcom could be anxious to cherry-pick parts of the universal service obligation that they foresee as profitable.
Procurement determination is the technical term for saying that Ofcom will be looking after another company to take over part of the universal service obligation provision. If it were removed from the Bill, Ofcom would still have power to carry out a review of the universal service obligation. We have discussed such matters at length, so I shall not go over all the different ways in which Ofcom can carry out such a review. It would also have the power to act under clause 44, which we have also mentioned, if the regulator believes that there must be some further change in the universal service obligation.
Our main fear about the procurement determination is whether the universal service obligation will be broken up to give some postal providers the opportunity to make partial provision. That would obviously have a specific and possibly detrimental effect on the current provider of the universal service, as it could become less financially viable. We are concerned about that, and for that reason, we are anxious that this particular element should be taken out of the clause to take away the opportunity for Ofcom to make a procurement determination. In our mind, it would be giving Ofcom powers that Postcomm does not have at the moment. To make a procurement determination is to introduce a real and determined threat to the integrity of the universal service obligation.
Those are the reasons for our amendments. First, we want to provide a proper tender period for proper business planning. Secondly, we want to ensure that any switchover to another provider has a three-year running period, for both the provider pulling out and the provider pulling in, and that there is no opportunity to hive off bids in the meantime, here, there and everywhere, to the detriment of the universal service provider.

Edward Davey: I am grateful for the way in which the hon. Lady has introduced the amendments. I understand where she is coming from. Her intentions in tabling them are laudable, and I have a lot of sympathy with the thinking behind them. However, I hope to reassure her that while I am sympathetic to her intentions, in my view the amendments are not needed.
The matter returns to something that I am afraid I have repeated many times in our proceedings, which is that Ofcom’s primary duty is to secure the universal service. Therefore, it is not going to act, following its own review, in a way that could potentially undermine that service, whether it is thinking about a compensation fund or about particular procurement options, as the hon. Lady was talking about.
Ofcom would fail in its primary duty if it looked at and used options before it in a way that undermined the provision of a universal postal service. That is the fundamental point of this part of the Bill. It is a fundamental protection, whether for Royal Mail, competitors or a potential investor looking at this part of the Bill and at the procurement compensation fund. People can be reassured that Ofcom’s primary duty is to ensure that a universal service is provided. I do not believe that there will be more than one company in the foreseeable future that is able to do that and meet Ofcom’s requirement. Of course we have had those two specific issues—this is one of them—where one can imagine that Ofcom or, in terms of the postal administration order, the Secretary of State, looks to more than one universal service provider.
Our thinking in this part of the Bill does not lead to the prospect of there being two national universal service providers, which I think is the fear behind the hon. Lady’s concerns. When we debated clause 38, I said that one might imagine another universal service provider operating in a very small area of the country, perhaps providing services to one island, and to one address on one island. The hon. Member for Ochil and South Perthshire said that that would be my address. I live in a terraced house in Surbiton, and it would, therefore, be a particularly unusual procurement to provide a universal service provider for just my own address. However, anything is possible.
When devising the policy, I always imagined that if Ofcom, in ensuring that it was meeting its primary duty, under clause 28, to provide the universal service, decided to take the procurement option because of an unfair burden on the universal service provider, that would be in pretty unusual circumstances and would apply only to small geographical areas. I hope that that reassures the hon. Lady and other Members who might be concerned but, having made those preliminary remarks, let me delve into more detail, to reassure her further.
Because the aim of the Bill is to secure the provision of a universal postal service, one has to look at everything in the round. The pension, employee share and regulatory provisions all come together to ensure that the universal postal service can be provided. However, we have to ensure that we take precautions in case the solution that we have come up with in our policy does not work. It would be absolutely irresponsible of any Government not to make provision in a Bill for things that might happen if everything went wrong. We are talking about safeguards, not about what we expect to, want to, or predict will, happen—far, far from it. The approach of our overall proposal will sustainably deliver a universal postal service, but if things get even worse than we expect and letter volumes fall off a cliff far faster than even the worst predictions, or other market changes erode Royal Mail’s ability to meet the costs of providing a universal service, we need safeguards. Clauses 42 and 43 try to provide those safeguards.
Clause 43 addresses the risk by providing a menu of three possible actions that Ofcom may take, after carrying out a review and as directed by the Secretary of State on acceptance of that review, should the provision of the universal service represent an unfair financial burden on the universal service provider. The first option is a review of the minimum requirements of the universal service, as set out in clause 33. Option 2 is the creation of a compensation fund to share the cost of the unfair burden on the universal service provider. We have discussed that option, and it is set out in more detail in clause 44. The third option is the making of a procurement determination.
So, there are three options if things go wrong, and I contrast that with the 2009 Bill which contained only one option—the compensation fund. Unclear, and hidden, was the provision of the European Communities Act 1972 for a reduction in the minimum service requirement through the negative procedure. That was not a very satisfactory approach, but those were the two options, and only one of them was in the Bill. In this Bill we give Ofcom and the Secretary of State three options for action if things go horribly wrong.
Let me briefly set out how we get to that point and how the actions might work. In brief, once Ofcom has conducted a review of the cost of the universal service, and if it concludes that there is a financial burden, clause 43 requires Ofcom to determine whether it is unfair for the universal service provider to bear that burden. If Ofcom concludes that the burden is unfair, it must submit a report to the Secretary of State with a recommendation for the action, if any, it considers should be taken to deal with the burden. That is the initial process, with Ofcom at the heart of it. For the avoidance of doubt, I re-emphasise that the powers are extremely unlikely to be needed or used. They are safeguards to future-proof legislation in the event of a crisis.
A procurement determination, which is what the group of amendments is about, would mean that another operator could provide part of the universal service with less or no need for compensation from users or the market, and with a reduced risk that minimum requirements would need to be reviewed. That is a valuable tool. The fact that more such tools are available is a step forward from the 2009 Bill. That is the process by which we would have to operate.
I will deal with the specific amendments because they raise useful issues. Amendment 110 would require Ofcom to give a universal service provider three years’ notice before designating anyone else as a universal service provider in relation to any part of the universal service. I understand the sentiment behind the amendment—a universal service provider would need time to wind down relevant operations without incurring a large unfair burden, if it is found that someone else will provide part of the universal service. The hon. Lady went into some detail about the sorts of costs and investments that would have been sunk and, therefore, what would be involved.
Again—this is critical in answering the amendments—I refer the hon. Lady to the primary duty of Ofcom, which is to secure the provision of the universal postal service. That means the whole of the universal postal service, having regard to its financial sustainability and efficient provision. With that in mind, the proposed amendment is unnecessary.
The Bill gives Ofcom the tools it needs to secure the universal service. If the Secretary of State directs Ofcom to make a procurement determination, it would still need to ensure the provision of the whole of the universal service having regard to its financial sustainability. It could not do anything that would go against that. Therefore, if it felt that it was necessary to give a period of notice in order to provide for the smooth transition of one part of the universal service from one provider to the new provider, it would need to do so—Ofcom could not act capriciously, taking a course of action that would in any way endanger the delivery of its primary duty.
The hon. Lady talked about a figure of three years in amendment 110. From her remarks, I was not quite sure why she had set upon three years—there might have been a particular reason. However, I hope that I have at least convinced her that the amendment is unnecessary and I hope that she will not press it.
In a similar vein, amendment 109 prevents Ofcom from making a procurement determination for 10 years from when the clause comes into force. I understand and have sympathy with the intentions behind the amendment, but the arguments I have made should reassure the hon. Lady. It is important to ensure that Ofcom has the tools it needs to secure the universal postal service. I have yet to see a justification for preventing the use of one of our menu of options in the event of an unfair burden on the USP. Let me repeat: the provisions are there to protect the universal service in the event of a crisis. Obviously, we do not expect such a crisis within the next 10 years—or at all—but it seems more prudent to retain the option just in case such an intervention is needed.
Let me be absolutely clear. The powers are a prudent precaution—we do not expect them to have to be used. They are not a way of creating some tendering or franchising process, or some hidden way of introducing it. The powers are safeguards and purely precautionary. It is important that I keep emphasising that, not just for the hon. Lady but for the Royal Mail and any potential investors—they need to know that the provision is not some approach to creating a bidding process every so often. It is about protecting the universal service in the event of a crisis.
In conclusion, amendments 119 and 120, in contrast to the other two amendments in the group, seem to want to get rid of procurement as an option altogether, even if there is an unfair burden. I will not repeat my arguments but, for the record, procurement is a sensible option to allow Ofcom to recommend, in case it is necessary for the provision of the universal service. It gives them another arrow to their bow.
I refer the hon. Lady to article 7(2) of European directive 97/67/EC, of December 1997, which, in the chapter on financing of the universal service, speaks to the procurement option in the same article as it speaks to the compensation fund. It is not an option that has simply been dreamed up by the Government. It is there in the directive that underpins the legal framework on this issue. The previous Government did not include it in the 2009 Bill—I do not understand why. It is sensible to have that option available, even though I do not think that it will be used. It is worth noting for the record that if one looks at how Deutsche Post operates and the legal framework that it operates in, there is a provision for the procurement of the universal service in Germany, should that be necessary, but it has never been used. I am sure that those people who studied Deutsche Post—

Gregg McClymont: Doctors.

Edward Davey: Be they doctors, professors or pure commoners, they will conclude that the procurement option is not something that would be considered under normal circumstances. It is just an important safeguard. With that little trip to Deutschland, I ask the hon. Lady to withdraw these amendments.

Nia Griffith: Well, I was expecting to hear all sorts of interesting facts about Deutsche Post, but I will obviously have to wait for another time. The issue is that 10 years is a short period of time. It is a new scenario and a new adventure for the universal service provider to be a privatised company in this country, when for centuries it has been in public ownership. It needs to be given a fair chance, albeit we do not agree with the idea of its being privatised in the first place. If it is going to have a go at providing an excellent universal service, but within the private sector, it needs to have the proper opportunity to do so. That is why we think that there should be an opportunity for a 10-year period to be granted to that provider, so that it can make the necessary investment, build on the fact that it has done all that modernisation and, we hope, provide an excellent service for the next 10 years. For that reason, I would like to press amendment 109 to a vote, because it secures that 10-year period for the provider to provide the universal service obligation.
Following from that, it would be possible to find another provider, I suppose, in less than three years. We would much rather see a proper three-year run-in period, but we would consider withdrawing amendment 110. We still think that it would be best practice to have at least that amount of time, but maybe we do not need that fixed in the Bill. We want to press our two amendments on procurement determination to a vote.

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Amendment proposed: 120, in clause 43, page 26, line 27,leave out subsections (9) and (10).—(Nia Griffith.)

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Amendment proposed: 109, in clause43,page26,line36,at end insert—

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Clause 43 ordered to stand part of the Bill.

Edward Davey: On a point of order, Mr Amess. In his fantastic remarks on schedule 4, the hon. Member for Ochil and South Perthshire bowled a few googlies, and I may have inadvertently given the Committee some incorrect information during that debate.
The hon. Gentleman asked about the application of schedule 4 paragraph 7 to the universal service provider. Contrary to what I said earlier, I understand that that paragraph could apply to the universal service provider. He may wonder what would happen to the universal service if that situation arises, but I can reassure him that, should that happen, it is almost inconceivable that Royal Mail would not pay the charges required of it. Given Ofcom’s duty under clause 28, it is even more inconceivable that Ofcom would be able to take the extreme step of suspending the provision of the universal service, and when one thinks about it, that immediately becomes apparent. In such unlikely circumstances, Ofcom would be able to take legal proceedings against a universal service provider for payment of the charges due, rather than follow the suspension option. I hope that assists the hon. Gentleman and the Committee.

David Amess: The record will be duly amended, and we are very grateful to the Minister.

Ordered, That further consideration be now adjourned.—(Mr Newmark.)

Adjourned till Thursday 9 December at Nine o’clock.